Did Homestore (HOMS) screw AOL shareholders by not intending to pay on the agreement it made?
"In the agreement, the Company has guaranteed that the 30-day average closing price, related to 60%, 20% and 20% of the shares it issued, will be $68.50 per share on the third, fourth and fifth anniversaries of the agreement, respectively. " see the accounting section from this report from April 2001
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April 25, 2001
RELEASED @ 12:00 pm PST
Attention All Business Editors: Pacific Equity Investigations Initiates Homestore.com, Inc. (NASDAQ:HOMS), with an Immediate Sell Recommendation @ 35 , PART I
NOTE TO EDITORS: The following is an investment opinion issued by InsideTruth.com
San Diego, CA – April 25, 2001 InsideTruth.com Initiates Coverage On Homestore.com, Inc., (NASDAQ:HOMS), with a Strong SELL rating and a price target of 2 to 3 Dollars in the next 6 to 18 months.
· COMPANY DESCRIPTION:
Homestore.com, Inc., operates numerous websites related to the home building and realty industries. In addition to its main website, Homestore.com, it operates the following: (1) Realtor.com, which displays listings of homes for sale from the MLS database which is owned by the National Association of Realtors; (2) HomeBuilder.com, which displays building lots, builders, and new homes; (3) CommercialSource.com, which displays commercial properties for rent; and (4) Move.com, which displays resources about household moving and was recently acquired from Cendant Corporation. In essence, Homestore.com and its affiliated websites are advertising sites that derive a significant amount of revenue from Realtor(tm) subscribers who advertise in conjunction with their listings as well as commercial advertisers who offer other services to the home buying and renting markets.
· FINANCIAL DATA & STATS:
Shares Outstanding : 107,000,000
52 Week High/Low : $55.00 / $ 14.06
Closing price 4/24: $ 29.43
Market Cap: $ 3.1 Billion Dollars
Gross Revenue Last FY : $ 230.0 million
Total Net Income (Loss) Last FY: (-$115 .2 million)
Cash per share: $2. 50
· OVERVIEW :
Homestore.com operates websites that display consumer information on housing, offices, relocation, and related topics. InsideTruth.com believes Homestore.com is grossly overvalued and is a holdover from the Nasdaq bubble days of investor infatuation with any business connected with the internet regardless of whether the underlying business model is sound and profitable. Indeed, InsideTruth.com believes that Homestore.com operates under a suspect business model. The following points comprise the foundation of our critique of Homestore.com’s current valuation:
· revenue model is wholly advertising based;
· subscriber base of Realtors is misleading and has little or no likelihood of future growth;
· no revenue or fees from real estate transactions;
· website content is not relevant to the sale of most real property, and is irrelevant to most Realtors;
· competitive factors;
· "creative" accounting practices termed “pro forma results “ which understate expenses while excluding very real expenses altogether;
· voluminous insider sales and registration of stock for sale; and
· Homestore.com, Inc. is tantamount to an
“ ELECTRONIC NATIONAL YELLOW PAGES “
CONCLUSION
Because Homestore.com’s revenue model is based solely on advertising and “subscriber” revenues, the company, in all likelihood, will never make a profit. Even if it does, it is likely to be insignificant and would be but a tiny fraction of its current $3.1 billion market valuation. Buyer beware!
· REVENUE MODEL: ADVERTISING AND MORE ADVERTISING
Do not be fooled by the official line of the company, Homestore.com receives 100% of its revenue from advertising. Approximately 48% of Homestore.com revenue is traditional banner advertising, a source of income that has been drastically devalued by the market in recent months because of rapidly collapsing metrics. The other 52% of Homestore.com’s revenue is also advertising, although the company likes to call it "subscriptions". Subscriptions are payments received from subscribing real estate professionals who pay to have their pictures and phone numbers prominently displayed on Homestore.com’s Realtor.com website. It is advertising, paid on a monthly basis, by real estate professionals. This revenue base has never been sufficient to stem Homestore’s massive (and increasing) quarterly losses, and there is no sign that it will do so in the foreseeable future.
Homestore.com’s last quarterly report contained the following observations:
Each unique user spent an average of 19.7 minutes per month on the network, down 16% from the third quarter of 2000. Page views were 605 million for the quarter, .. .down 13% from the third quarter of 2000.
These declining metrics explain why investors are fleeing internet advertising models as a basis for a viable business model. Indeed, DoubleClick, the acknowledged industry leader in internet advertising, has seen its stock price fall 90% from its year 2000 high.
NOW INSIDETRUTH.com WOULD LIKE TO RELEASE AN EXCLUSIVE SHOCKER !!!!
· EARNINGS & SUBSCRIBER SURPRISE !!!
The following explosive part of this report is not only true but exposes, in our professional opinion, illegal disclosure activities !!!
At Insidetruth.com, our goal is to gather facts and present the truth to the public regardless of any sacrifices we endure to inform and educate the investing public. Insidetruth.com was made privy to information regarding Homestore.com that is supposed to be a huge surprise to the public when it reports its earnings. After learning this information we decided we must disclose it and do it before the company does so “officially”. We refuse to participate in what many if not most of the Street analysts and their respective firms did these past few days and weeks: trade on inside information.
We believe these types of conversations take place daily between company insiders, Wall Street analysts and reporters. These conversations are in violation of securities laws and, in particular, the new “Full Disclosure“ regulations recently enacted by the Securities and Exchange Commission.
We believe it is our duty to disclose the following information publicly. An Insidetruth.com staff member posed as an analyst and then as a reporter while contacting Homestore.com. That Insidetruth member had conversations with Katy Moore, Senior Manager Of Corporate Communications at Homestore.com, Inc. She asked repeatedly that she not be quoted and “to keep everything hush-hush”. She then went on to disclose to us that Homestore.com will announce a “doubling or an almost double of their subscribers in their very next earnings release”. (In its prior earnings report, Homestore announced a subscriber base of 145,000 real estate agents.) Although HOMS on Feb 20, 2001 , a press release stated that HOMS would be doubling its subscriber base with the Move.com aquistion, we take the position that by Disclosing to us the doubling of subscribers a qtr earlier than they will recognize the revenue from Move.com constitutes an illegal act. Remember, noone knew when these subscribers would be recognized . It makes NO sense that in the 1st Qtr, they take on the move.com subscribers and then wont recognize revenues till the second Qtr from the same aquisition. It certainly seems inflammatory to us
We are curious how a corporate spokesperson can legally disclose non-public and seemingly material information to ANY party and then request not to be quoted before the actual numbers are made available to the public through traditional dissemination methods? Maybe this is a new “Full Disclosure” caveat that ‘dot bombs’ employ to keep analysts and reporters motivated to write glowing reports about their money-losing operations. These additional “subscribers” were obviously gained from the acquisition of MOVE.com, but it will be spun as if these Realtors just signed up with Homestore.com and to reaffirm its flawed business model. Read the filings closely and you will see that Homestore.com actually reduced rates for advertisers and in many cases REALTORS pay nothing at all although they are” New Subscribers “
An analysis of Homestore’s SEC filings actually reveals that, in our opinion, Homestore.com has almost no growth whatsoever in their subscriber base and any and all reported increases are due to several unmentioned key factors:
1.) Homestore.com recently eliminated the 1 year contract for advertising Realtors;
2.) Homestore.com recently reduced dramatically the fees charged for this advertising; and
3.) Homestore.com recently adopted a new advertising model where many of these “new” subscribers do not pay anything at all even though they will use these acquired subscribers to inflate the Subscriber Numbers.
The above matters are very material events which have never been made public by press release or other public media even though we consider such items to be of material magnitude and thus subject to public dissemination rules and laws. We believe it is a direct attempt to mislead the investing public with regard to Homestore.com.
· REAL ESTATE AGENT SUBSCRIBER BASE NEARLY MAXED OUT
According to Charlotte Wrobleski, Membership Manager of The National Association of Realtors (“NAR”), there are approximately 760,000 Real Estate Agents registered with the NAR. These numbers, however, are misleading. According to the President of the California Association of Realtors, 80% of all real estate transactions are done by the top 30% of all real estate agents. The number of housewives and other part time agents who hold a license and have never sold or listed a property is incredibly high. As a result, the potential market for Homestore’s subscriber base is actually, in our opinion, not even half what they actually claim. These extraordinarily large number of inactive real estate agents have no motive or desire to spend $1,000 per year to a website to advertise who they are as they derive no income from their licenses and are “listingless.”
In summary , we believe that Realtors will maximize their profits and reduce their costs in the near future and stop paying subscription fees to Homestore.com and will instead advertise locally or with other sites such as MSN. We will delve into the competition as well as Homestore.com’s reputation with the real estate agent community in later reports covering Homestore.com.
· NO REVENUE FROM REAL ESTATE TRANSACTIONS
Despite making ongoing claims to have the "monopoly" on real estate listings, Homestore.com receives NO REVENUE WHATSOEVER from any real estate transactions, including sales of homes, rentals, refinancings, etc. The Realtors, who collectively own the MLS database, have no intention to share the lucrative stream of revenues derived from commissions on home sales with Homestore.com or its shareholders. Why should they? The website is just an advertising expense to them, and Homestore.com does not own the database of listings, the Realtors do!
· WEBSITE CONTENT IRRELEVANT TO MOST REAL ESTATE TRANSACTIONS
Our interviews with real estate professionals reflect the widespread opinion that Homestore.com’s listings are not a relevant component of the vast majority of real estate transactions. There are several reasons:
· In hot markets, the best homes are sold before the listing ever becomes available on the website:
· In hot markets, such as Southern California and New York City, the average home is on the market for well less than 30 days. In slower markets, the average is more like 90 days, according to real estate agents interviewed by Insidetruth.com in both markets. The time lag before listings appear on Homestore.com renders most listings useless at best, for all but the least desirable, slowest moving listings;
· The much-touted 360 degree photos of the listed houses often take up to two weeks to appear, by which time most well-marketed houses have been put under contract;
· In our interview with the President of the California Association of Realtors, he states that he can recall only one transaction over the last year in which Homestore.com played a role in the sale; and
· If a potential buyer sees a home of interest, it is completely inadvisable for them to contact the agent advertised with the property: that is the listing agent, who represents the seller. While the real estate profession allows the same agent to represent both the buyer and seller in a transaction, a clear potential for conflict-of-interest exists; in all cases the prospective buyer is better served by engaging their own agent to negotiate on their behalf, not the listing agent;
Besides these listings , Homestore.com’s websites are primarily an electronic version of a National ”Yellow Pages“ of display advertising for ancillary services to the home buying and home construction markets.
· COMPETITION
Competition From State and Regional Multiple Listing Services (MLS)
In many regions and states, Multiple Listing Services (MLS), have developed
websites that compete directly with Homestore.com by listing all area
properties. For example, Utah requires licensed Realtors to subscribe and list
all properties for sale on this Utah MLS site utahrealestate.com .
A buyer using Homestore.com's site to search for properties priced $150,000
or above in Salt Lake City, Utah, would find 75 properties. A buyer using
the same criteria on the Utah MLS site will find a list of 2805 properties.
This suggests the additional cost of advertising properties on the
Homstore.com site is of little benefit to a Utah Realtor. Furthermore, this
comparison demonstrates Homestore.com’s failure to provide a competitive
service for buyers in this situation.
· "BOGUS" CREATIVE ACCOUNTING
Homestore.com’s accounting contains the same disturbing "creative accounting" practices that have been the source of criticism of Priceline.com, PurchasePro, and numerous other "dot bombs". In particular, Homestore.com does not reflect amortization of a massive payment to AOL for advertising services. This amount, if booked as the "advertising expense" it truly is, is sufficient to reverse the company’s reported "4c earned on pro-forma basis" in the last quarter, to a substantial loss. Consider the following, from Homestore’s last 10-Q, before you believe the company’s numbers.
In April 2000, the Company entered into a five-year marketing and distribution agreement with America Online, Inc. ("AOL"). In exchange for entering into this agreement, the Company paid AOL $20.0 million in cash and issued to AOL approximately 3.9 million shares of its common stock. In the agreement, the Company has guaranteed that the 30-day average closing price, related to 60%, 20% and 20% of the shares it issued, will be $68.50 per share on the third, fourth and fifth anniversaries of the agreement, respectively. This guarantee only applies to shares that continue to be held by AOL at the end of each respective year. At September 30, 2000, the Company has recorded $186.1 million in other non-current liabilities, which represents the fair market value of the 3.9 million shares of the Company's stock issued upon entering the agreement and the guarantee of the stock. The difference between the total guaranteed amount and the liability recorded will be recorded as other expense over the term of the agreement. In connection with the guarantee, the Company established a $90.0 million letter of credit being shown as restricted cash on the balance sheet, that can be drawn upon by AOL in the event that the our 30-day average closing price is less than $68.50 at the end of each respective guarantee date. The letter of credit will be reduced to $50.0 million at the end of the third anniversary of the agreement. The term of the agreement may be reduced if AOL draws more than $40.0 million from the letter of credit at the end of the third year anniversary of the agreement.
What is going on here? In April 2000, Homestore.com subscribed to a large amount of advertising on AOL’s websites for a five year period and paid for the purchase with stock and cash having a total value of $ 287 million. However, Homestore.com guarantees the price of the stock used to make the deal with its own cash. Because its stock has fallen well below the threshold of the guarantee, and has no hope of ever recovering this level of valuation, it is going to pay the difference in cash. This deal explains in part Homestore.com’s motivation to "spin" its intangible monopoly value – every dollar the stock falls in value means more cash owed to AOL.
In light of Homestore’s declining website metrics, operating without AOL advertising would drastically reduce its traffic further. Why does this liability not translate to an operating expense?
We believe that none of HOMS future earnings or past reports can be relied upon based on what we perceive to be flagrant accounting distortions that DO NOT accurately reflect the company’s true financial position. These reports obscure the truly bleak financial picture, enabling insiders to continue to sell more and more of their own stock to the public at a rate of almost 1,000,000 dollars per day. Their accounting understates the tremendous cash burn they face as a result of one of the most insane and frivolous deals any company has ever structured in order to secure America Online ( NYSE:AOL ) as a partner. This deal doesn’t cost AOL a dime, while AOL is the sole beneficiary as contrasted to Homestore.com’s public shareholders. It is our firm opinion that the analysts, who we will cover in greater detail in PART 2, are all part of an attempt to try and save Homestore.com’s share price in order to derive further investment banking revenues and to save face. We believe they will fail miserably.
THE LAST AND MOST IMPORTANT ACCOUNTING GAME !!
We have explained why you cannot trust the numbers that come from Homestore.com, but one of the slickest reasons is simple math. The Company continues to issue more and more stock as the losses grow and grow, but they don’t grow quite as fast as the dilution and the increases in shares outstanding and thus the loss per share on a GAAP (generally accepted accounting principles) basis continues to drop. In actuality, the shareholders are being diluted and the insiders sell to the public their shares on seeming lower losses and higher “Pro forma earnings.” ( We already explained that releasing “pro forma numbers” should be viewed as one of the biggest frauds that the bubbleomaniacs have ever created in deceiving the public.) In layman’s terms, this is one of those deals where the losses per share keep going down only because the number of shares keeps going up and up and up!
· INSIDER SALES
While nearly all "dot com" companies have become infamous for insider sales, Homestore.com insiders have absolutely cornered the market when it come to milking the public and enriching themselves . Homestore.com insiders are in a class by themselves. We count OVER 580 FORM 144 FILINGS (Insider Proposed Sale), accelerating up to the current month, representing almost 20,000,000 shares and $ 600 million of the public’s cash diverted into their pockets. Insiders have reaped more than twice as much money as the company has collected in gross revenue since inception, and more than they are likely to ever earn over the next 20 years based on our analysis, assuming, of course, the unlikely event that Homestore.com can survive beyond the next 12-18 months.
biz.yahoo.com or insiderscores.com
(Be patient, these pages take a while to load because there are so many darn filings.)
Now ask yourself, if you put all these insiders in a room, who would know more about Homestore.com’s future prospects -- these folks, or the investing public? Why would they be selling in such quantity if this business had compelling prospects for its future value? So if they are selling in such magnitude, then why should the public be buying? Homestore.com is a failure waiting to happen. Realtors aren’t going to allow them to share in the lucrative revenue stream of commissions on real estate transactions. Furthermore, there is little or no future revenue growth possible from Realtors since the vast majority of ‘real’ Realtors have already signed up with Homestore.com .
There is one thing that Homestore.com did well. They forced Realtors who actually do list homes and who do represent sellers, into sending a few bucks a month to them. But we also know that they use the inflated 760,000 Realtor figure as a carrot to lure in potential buyers of their stock. Very few of the ‘dot bomb’ failures have been able to sell so much stock to the public, have so little cash, have such low growth rates and still spin the story as well. All of this in an attempt to convince the public that this Company is actually more than a mere “Electronic Yellow Pages “ for homes that are most likely already sold.
COMING IN PARTS 2 & 3
· MASSIVE DILUTION FOR HOMS AND COUP BY CENDANT BY SELLING HOMS THE MONEY LOSING MOVE.com !!!
· ANALYSTS OF HOMS !!
· MORE ACCOUNTING TRICKERY !!
· MORE ON INSIDER SALES !
· INTERVIEWS !
· MUCH MORE ON COMPETITION !
· THE INVESTIGATION CONTINUES !!!!!!!!!!
PART 2 Will be released within the next 7 day
Pacific Equity Investigations is an equity valuation research center. It may and often does have positions that are consistent with its reports. Anthony Elgindy is a professional trader and analyst, and one of the most well-known investment commentators on the internet. His work has been featured in numerous financial news media. He has appeared on TV shows "20/20" and "Justice Files" speaking out to warn the public about the risks of fraud and overvalued equities. He is the #1 most bookmarked person on the #1 financial discussion site, Silicon Investor siliconinvestor.com , and he is known as the " Mad Max of WallStreet " by WIRED MAGAZINE, wired.com |
